214: Should You Trade Currencies (Forex) Like Soros?

How the foreign exchange market works and how George Soros made more than a $1 billion shorting the British pound in 1992. Why currency trading today is more like gambling than when Soros made his billions. Why trading closed end funds can be more profitable than currency trading.

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Episode Summary

On this episode of Money For the Rest of Us, David examines a topic brought up by an avid listener – should you trade currencies in foreign exchange markets? And can regular traders achieve massive success like George Soros did in 1992? Throughout this podcast, David outlines why he doesn’t trade currencies as an investment strategy and explains why you should consider other options like the closed-end fund markets instead. The differences between the markets of 1992 and today’s markets are detailed, and David sheds light on the complex world of trading currencies in a way that’s easy to understand. You won’t want to miss this episode.

George Soros succeeded in foreign currency exchange, but it was an exception – not the norm

In 1992, George Soros famously made a billion dollars in the foreign exchange market. His hedge fund, the Quantum Fund, established a $10 billion short position in the British pound that ultimately forced the British government to exit the European Exchange Rate Mechanism, a precursor to the euro that fixed exchange rates between European countries. After exiting the ERM, the pound fell immediately 15% against the German Deutsche mark and 25% against the U.S. dollar, swelling Soros’ Quantum Fund’s assets to $22 billion from $15 billion.

Modern markets differ greatly from that of 1992, and success through trading currencies is unlikely

The type of success that Soros achieved is highly unlikely today because currencies “float freely.” In 1992, the European Exchange Rate Mechanism and the actions of the British government to support the pound acted like a dam that prevented the downward market pressure from causing the pound to fall in price, until the dam broke.Today’s forex market simply doesn’t see these types of dams anymore. Trends in exchange rates are highly unpredictable, and even the best investors who watch trends often make the wrong predictions. That’s why investing through a currency trading strategy isn’t the best idea.

Forex trading is like gambling

Platforms such as Darwinex allow regular individuals to trade currencies in a transparent way. However, what many investors don’t understand is that for every trade there is a winner and a loser. Consequently, the expected return is zero and after fees or the spread that platform charges, the expected return is negative. Strategies that have an expected negative return are similar to gambling. Because individuals never quite know what a currency is going to do relative to other currencies, even the best decisions are only speculations that often rely on historical trends. It’s not calculated risk, it’s simply trading and hoping for the best. He encourages listeners to consider all the risks involved in trading before investing in these types of markets.

Investing in closed-end fund markets is a much better strategy – here’s why

Closed-end fund markets are a much more reliable way of investing, mainly because most of the investors are individuals. You’re not betting against governments, trading bots or large corporations, but rather individuals. Many of these individuals are likely to exit investments when there’s turmoil in the market, allowing investors to purchase closed end funds at significant discounts to their net asset value.

Episode Chronology

[0:35] David introduces the listener question for this episode, “Should You Trade Foreign Currencies?”
[2:24] Why David would never invest in Forex strategies
[6:56] How trading works on platforms such as Darwinex
[8:43] Investing through trading currencies is like gambling
[11:40] The George Soros story and how governments can balance the economy through interest rate control
[24:20] Betting against the exchange rate of foreign currencies isn’t reliable
[27:50] The benefits of investing in closed-end fund markets

Transcript

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